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Wednesday, February 11, 2009

Stealth Tax Increases

Obama has been bragging about his plan to cut taxes to "stimulate the economy". Taxation is theft! Any taxation rate higher than zero is too high.

Did you notice that politicians cut taxes more often than they raise them? Did you ever wonder about that? Didn't President Bush cut taxes recently?

The answer comes from a progressive taxation schedule, combined with money supply inflation.

In the USA, some/most tax laws are not indexed for inflation. Other tax laws are indexed for inflation, but via the CPI, and the CPI is less than true inflation.

As usual, a concrete example helps illustrate. Suppose the income tax schedule was 25% on income up to $20k, and 50% for income over $20k.

Suppose your income is $30k. You pay 25%*$20k + 50%*10k = $10k. Your tax bill is $10k, for an average taxation rate of 33%. Your marginal taxation rate is 50%, but your average taxation rate is 33%. "Marginal taxation rate" greater than "average taxation rate" helps provide people with the illusion that taxes are lower than they actually are. If you have the opportunity to work overtime for an extra $5k, you only get $2.5k after taxes. When making economic decisions, it's your marginal taxation rate that matters and not your average taxation rate.

Suppose that inflation is 33% over one year or a period of 2-3 years. Suppose your income keeps pace with inflation. (Most Americans have salaries that increase less than true inflation.)

After inflation, your income is $40k. Let's calculate your tax bill. You pay 25%*$20k + 50% * 20k = $15k. Your tax bill is $15k.

Notice that your average taxation rate has increased from 33% to 37.5%. The increase in your income was merely compensation for inflation, but the progressive taxation schedule means that you experienced a tax hike. Your pre-tax income kept pace with inflation, but your after-tax income decreased.

Now, the new President says "To stimulate the economy, I'm cutting everyone's taxation rate by 2% on incomes up to $40k!" This brings your taxation rate back to 35.5%. Your actual taxation rate has increased, yet the President and Congress brag about how they just cut taxes.

For investment income, the bulk of your return is usually compensation for inflation. Remember that the S&P 500 is a worse investment than gold, and gold should have a 0% inflation-adjusted return! Via capital gains taxes, the State taxes you on your investment "gains", when you're really struggling to keep pace with true inflation. You pay both the inflation tax, and additional capital gains taxes on investment gains that were merely compensation for inflation.

Summarizing, inflation combined with a progressive taxation schedule is a stealthy way for politicians to raise taxes. If Congress does not change the tax code in a year, everyone gets a tax increase. Periodically, they re-adjust the schedule. Politicians get to brag about cutting taxes, and people don't become wise to the scam.

All forms of taxation are theft. Inflation plus progressive taxation rates allow the State to leech an ever-increasing percentage of the economy, without most people noticing.

1 comment:

fritz said...

Every time you expose a scam to me. It always make me think (Why didn,t I see that before). So much smoke and mirrors. I often wonder what master minds have developed these deceptions. Or was I and most other folks so out of touch that I never bothered doing the math my self. And just relied on the press(censored)to report to me what I didn't bother to investigate myself.


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